DOCUMENT RESUME 03107 - rA22733741 Association's Examination of the Government National Mortgage September 30, Ended Financial Statements for the 15-Wonth Period pp. + 5 appendices 1976. FOD-?7-11; B-114828. August 9, 197X. 11 (22 pp.'). General. Report to the~ Congress; by lmer B. Staats, Comptroller (2800). Issue Area: Accounting and Financial Reporting Contact: Field Operations Div. (450); Budget Function: Community and Regional DevelopmentDevelopment Communi-y and regional Development: Community (451). Orqanization Concernedi Government National Mortgage Association, Currency congressional Relevance: ouse Committee on Banking, and Housing; Congress. of 1974 (P.L. Authority: amergency Home Purchase Assistance Act 93-449; 88 Stat. 1364). The financial statements present fairly the financial at position of the Government National Mortgage Association results of its September 30, 1976, and June 30, 1975, and the position for the operations and the changes in its financial and standards periods then ended, in conformity with principles of accounting prescribed by the Comptroller General. in several Findings/Conclusions: The Association is involved building. programs to stimulate mortgage lending and home for Through these programs, it: provides special assistanceowned financing mortgages; manages and liquidates federally and acts as mortgages; guarantees mortgage-backed securities: major activities trustee for three trusts- The Association's during fiscal year 1976 wre under the special assistance functions tandem plan programs and the mortgage-backed securities guaranty program. Undler the mortgage-backed billion securities guaranty program, the Association had $28.7 billion in outstanding securities at September 30, 1976--$27.1 on pass-through securities and %1.6 billion on bond-type securities. The Association does not receive a direct appropriation to finance its operations, but borrows from the outstanding at September 30, U.S. Treasury instead- The amount 1976, was $5,907 million. (Author/SC) REPORT TO THE CONGRESS "v . BY THE CO-MPTROLLER GENERAL o~-: o.'~vOF THE UNITED STATES Examination Of The Government National Mortgage Association's Financial Statements For The 15-Month Period Ended September 30, 1976 Department of Housing and Urban Development This report discusses the financial operations of the Government National Mortgage Associ- ation s special assistance functions, manage- ment and liquidating functions, nd mortgage- backed securities guaranty program. The financial statements present fairly the fi- nancial position of the Government National Mortgage Association at September 30, 1976, and June 30, 1975, and the results of its oper- ations and the changes in its financial position for the periods then ended, in conformity with principles and standards of accounting prescribed by the Comptroller General. F00-77-11 AUGUST 9, 1977 COMPTROLLIR GENERAL OF THE UNITED IrATTI WAUHINGTON. D.C. ada B-114828 To the President of the Senate and the Speaker of the House of Representatives This report summarizes the results of our examination of the financial staterents of the Go',ernment National Mortgage Association, Lepartment of Housing and Urban Development, for the 15--month pe .od ended September 30, 1976. We made our examination pursuant to the Government Corporation Control Act (31 U.S.C. 841 (1970 + Supp. V, 1975)). We are sending copies of this report to the Director, Office of Management and Budget; the Secretary of the Treasury; the Secretary of Housing and Urban Development; and the President, Government National Mortgage Asociation. omr'roller Genera of the United States COMPTROLLER GENERAL'S EXAMINATION OF THE GOVERNMENT REPORT TO THE CONGRESS NATIONAL MORTGAGE ASSOCIATION'S FINANCIAL STATEMENTS FOR THE 15-M('NTH PERIOD ENDED SEPTEMBER 0, 1976 Department f Housing anid Urban Development DIGEST OPINION ON FINANCIAL STATEMENTS The financial statements (schs. 1 through 3) present fairly the financial position of the Government National Mortgage Asaociation at September 30, 1976, and June 30, 1975, and the results of its operations and the changes in its financial position for the periods then ended, iri conformity with prin- ciples and standards of accounting prescribed by the Comptroller General. OTHER MATTERS The Association is involved in several pro- grams to stimulate mortgage lending and home building. Through these programs it -- provides special assistance for financing mortgages (see ch. 2), -- manages and liquidates federally owned mortgages (see ch. 3), -- guarantees mortgage-backed securities (see ch. 4), and -- acts as trustee for three trusts. (See app. I.) The Association's major activities during fiscal year 1976 were under the special assistance functions tandem plan programs and the mortgage-backed securities guaranty program. FOD-77-11 owr n be hn. Under the mortgage-backed securities guaranty program, the Association had $28.7 billion in outstanding securities at September 1976--$27.1 billion on pass-through 30, securities and $1.6 billion on bond-type securities. (See pp. 8 and 9.) The Association does not eceive a direct prvritic,; to finance its operations ap- rows from the U.S. Treasury instead. but bor- outstanding at September 30, 1976, was The amount million. (See p. 1.) $5,907 ii C o n t e n t s Page DIGEST CHAPTER 1 INTRODUCTION 1 2 SPECIAL ASSISTANCE FUNCTIONS 3 Mortgage acti ty 3 Operations 4 Tandem plan programs 4 Foreclosures 5 3 MANAGEMENT AND LIQUIDATING FUNCTIONS 6 Mortgage activity 6 Foreclosures 6 4 MORTGAGE-BACKED SECURITIES GUARANTY PROGRAM 8 Pass-through securities 8 Bond-type securities 9 5 SCOPE OF EXAMINATION AND OPINION ON FINANCIAL STATEMENTS 10 Scope of examination 10 Opinion on financial statements 11 FINANCIAL STATEMENTS Schedule 1 Statement of financial condition at September 30, 1976, and June 30, 1975 14 2 Statement of income, expense, and retained earnings for the fiscal years ended September 30, 1976, and June 30, 1975 16 3 Statement of changes in financial position for the fiscal years ended September 30, 1976, and June 30, 1975 18 Notes to the Association's financial statements 20 APPENDIX Page I Trustee operations 24 Schedule Trustee for Government Obli- gations Prticipation Sales Trust 1 Unaudited statement of finan- cial condition at Septem- ber 30, 1976, and June 30, 1975 26 2 Unaudited statement of income and expense for the fiscal years ended September 30, !975, and June 30, 1975 28 3 Unaudited statement of changes in financial position for the fiscal years ended September 30, 1976, and June 30, 1975 30 Notes the Trust's financial statements 32 Principal officials responsible for the activities discussed in this report 33 ABBREVIATIONS FHA Federal Housing Administration FNMA Federal ational Mortgage Association. GAO General Accounting Office VA Veterans Administration CHAPTRR 1 INTRODUCTION The Government National ortgage Association, Department of Housing and Urban Develupment, is a Government-owned cor- poration. It was created by the Congress in 1968 with the division of the Federal National Mortgage Association (FNMA) into two corporations. As a Government-owned corporation, the Government National Mortgage Association (li provides special assistance for financing mortgages, (2) manager and liquidatep federally owned mortgages, and (3) guarantees mortgage-backed securities. These activities are discussed in later chapters of this report. mn P-sociation also acts as tustee for three trusts, which i discussed in appendix I. FRMA, which inherited the name of the predecessor cor- poration, is a Government-sponsored, privately owned corpora- tion engaqed in secondary ortgage activities. Under the Government National Mortgage Aasociaticn's direction, FNMA buys and sells mortgages for the Association and manages the AssOciation'3 mortgage portfoli.o. Before the Emergency Home Purchaas Assistance Act o 1974, only mortgages insured by the FPderal Housing Admi .traaicn (FHA) or guaranteed by the Veterans Jministration (VA) were purchased for the Association. The Association reimburses FNMA for its serv- ices according to a service agreement between the two corpor- ations. The Emergency Home Purchase Assistance Act of 1974 (Public Law 93-449, 88 Stat. 1364, approved Oct. 18, 1974) was enacted to alleviate the national shortage of mortgage credit. The act expands the Association's mortgage purchase program by allowing it to purchase conventionally financed home mortgages, including individual units of condominiums and cooperatives. The Association is authorized to commit and spend $17.8 billion for these purchases. Cumulative pur- chases by the Association, as of September 30, 1976, involve 178,000 housing units valued at $6 billion. The Association does not receive a direct appropriation to finance its operations but instead borrows from the Treas- ury. The September 30, 1976, balance of notes payable to the Treasury was $5,907 million--$5,849 million for special as- sistance functions and $58 million for management and liquid- ation functions. The President of the United States, with the approval of the Senate, appoints the President of the Association.. 1 The Secretary of Housing and Urban Development directs the administration of the Association, determines general operat- ing policies, and appoints the Vice President and other ex- ecutive officers. The principal officials of the Association during fiscal year 1976 are listed in appendix II. 2 CHAPTER 2 SPECIAL ASSISTANCE FUNCTIONS The purposes of the Association's special as3istance functions are (1) to support the financing of housing for people urnable to obtain acceptable housing under established home financing programs and (2) to minimize the decline in home build' q or mortgage lending which helps to stabilize the home buf-Jing and mortgage markets. The Association provides this support by establishing a market for selected types of FHA-insured, VA-guaranteed, or conventional mort- gages which are insured by private insurers or have out- standing pri::c!ipal balances which do not exceed 80 percent of the values of the property securing the mortgages. When authorized b- the President or the Congress, the Association buys these mortgages from mortgage lenders thereby providing them with cast fr relending. The Association then sells the mortgages to mortgage investors or retains the mortgages in its portfolio. MORTGAGE ACTIVITY At Septembe; 30, 1976, the Association's special assistance functions mortgage portfolio was $5,821 million. The -ost and unamortized discount of this portfolio was $5, 2 million and $149 million, respectively. About $703 million o these mortgages was assigned to the trusts administered by the Association as trustee. (See sch. 1.) The average interest rate for the mortgages in the portfolio, including those assigned to the trusts, at September 30, 1976, was 6.06 percent, an increase from 5.62 percent at June 30, 1975. The interest rates for these mortgages range from 1 percent to 9-1/2 percent. The number of mortgages bearing interest rates of 7-1/2, 8, and 8-1/4 percent increased while mortgages bearing the other irterest rates decreased. The number of mortgages in the portfolio at September 30, 1976, was 151,393--an increase of 19,456 mortgages over fiscal year 1975. The increase was attributable to mortgage pur- chases exceeding mortgage sales and other liquidations. The mortgage portfolio at eptember 30, 1976, and June 30, 1975, is shown ir the following table. 3 Portfolio (note a) Portfolio (note a) September 30, 1976 June 30, 1975 Units Number Amount Number Amount (millions) (millions) FHA single-family 61,165 $ 947 70,049 $1,076 VA single-family 39,090 769 48,057 967 Conventional single-family 49,658 1,674 12,153 421 PHA multifamily 1480 431 1,678 63 Gross mortgages 151393 $5,821 131L937 $5,227 a/ Includes mortgages assigned to the trusts. OPERATIONS The Association finances its special assistance functions operations primarily with money borrowed from the Treasury. At September 30, 1976, notes payable to the Treasury were $5,849 million--an increase of $494 million over the pre- vious fiscal year. The average interest rate on these notes increased in fiscal year 1976 to 7.8 percent from the previous fiscal year's 7.38 percent. The notes mature on July 1 of each year from 1978 to 1981. In conducting its special assistance functions, the Associatior incurred a net loss of $796 million for fiscal year 1976--an increase of $483 million over fiscal year 1975. (See sch. 2.) The loss was attributable largely to (1) the difference between the average interest rate of 7.8 percent paid on money borrowed from the Treasury and the average interest rate of 6.06 percent earned on mortgages in the portfolio and (2) the $599 million incurred in financing tandem plan programs. Tandem plan programs The purpose of tandem plan programs is to enable the Association to support and stimulate home financing with- out massive cash outlays needed to make direct mortgage purchases. These programs provide favorable financing for multifamily projects and single-family homes. The Association issues commitments to mortgage lenders to purchase mortgages (1) at interest rates below the pre- vailing FHA, VA, or conventional rates and (2) at favorable 4 purchase prices to meet housing and economic stability goals. To the extent possible, the Association sells the commitments to the mortgage lenders and pays them the dif- ference between the commitment price and the prevailing market price; the Association absorbs the difference as a subsidy. When it is unable to sell the commitments, theL Association purchases the mortgages at the commitment price and sells the mortgages to mortgage investors. Foreclosures The following table shows the number and amount of fore- closures of the special assistance functions for the fiscal years indicated. The Association'incurred losses on these foreclosures of $1.4 million, .02 percent of the fiscal year 1976 portfolio of $5,821 million, and $300,000, .006 percent of the fiscal year 1975 portfolio of $5,227 million. The losses represent interest the Association is unable to col- lect and foreclosure costs not allowed by FHA or VA. Foreclosures (note a) Foreclosures (note a) Fiscal year 1976 Fiscal year 1975 Units Number Amount Number Amount (millions) (millions) FHA single-family 658 $ 12 774 $ 12 VA single-family 522 13 273 5 Conventional single-family 25 - - - FHA multifamily 97 204 111 208 Gross mortgages 1,302 $229 1,158 $225 a/ Includes mortgages assigned to the trusts. 5 CHAPTER 3 MANAGEMENT AND LIQUIDATING FUNCTIONS T!ie Association is responsible for managing and liqui- dating federally owned mortgages with a minimum adverse ef- fect cn the home mortgage market and a minimum loss to the Government. These mortgages were originally owned by the dissolved Reconstruction Finance Corporation and by the De- partment of Housing and Urban Development. MORTGAGE ACTIVITY Regular principal repayments, sales of mortgages to ri- vate investors, and prepayments and foreclosures liquidate the mortgages. The Association did not purchase any mortgages under this program during fiscal years 1976 or 1975. In fiscal year 1976, mortgage liquidations were $13.3 million and net earnings were $6.8 million. (See schs. 2 and 3.) The management and liquidating functions mortgage port- folio at September 30, 1976, and June 30, 1975, is shown in the following table. Portfolio (note a) Portfolio (note a) September 30, 1976 June 30, 1975 Units Number Amount Number Amount (millions) (millions) FHA single-family 39,885 $226 44,933 $266 VA single-family 17,302 41 23,759 56 FHA multifamily 56 49 58 53 Other 570 6 1,152 8 Gross mortgages 57,813 $322 69,902 $383 a/ Includes mortgages assigned to the trusts. FORECLOSURES The following table shows the number and amount of fore- closures for the management and liquidating functions for the fiscal years indicated. The Association incurred losses on these foreclosures of $43,000, .01 percent of the fiscal year 1976 portfolio of $322 million, and 111,000, .03 percent of the fiscal year 1975 portfolio of $333 million. The losses represent interest the Association is unable to collect and foreclosure costs not allowed by FHA or VA. Foreclosures (note a) Foreclosures (note a) Fiscal year 1976 Fiscal year 1975 Units Number Amount Number Amount (millions) (millions) FHA single-family 176 $1 253 $2 VA single-family 13 - 9 - FHA multifamily - 1 - Other - - Gross mortgages 189 · '$ 263 $2 a/ Includes mortgages assigned to the trusts. 7 CHAPTER 4 MORTGAGE-BACKED SECURITIES GUARANTY PROGRAM The mortgage-backed securities guaranty program channels new capital into mortgage financing. The Association guaran- tees, for a fee, mortgage-baked pass-through and bond-type securities issued to the public by approved issuers. The securities are backed by pools of mortgages controlled by the issuers of the securities. PASS-THROUGH SECURITIES Securities on which principal and interest ae paid monthly to the security owners are designated "fully modified pass-through." The issuers administer the mortgage pools backing the securities, collect principal and interest on the mortgages, and make payments to the security owners. If issuers default in making the required monthly pay- ments, the Association's guarantee provides immediate and direct payment to security holders of any defaulted payments. The Association may also make tht payments to the security holders through the defaulted issuer or through a new issuer to which the pooled mortgages of the defaulted issuer had been transferred. The Association considers ts risk minimal since the pooled mortgages are insured by FHA or guaranteed by VA. In fiscal year 1976, four issuers defaulted on their payments to security holders and their pooled mortgages were later ransferred to new issuers. The new issuers received advances from the Association totaling about $872,000 to make the payments to the security holders and for other expenses incurred by virtue of the transfers. They were re7uired to repay the advances if the financial condition of the pooled mortgages permits. The Association may sustain a loss on a portion of the advance if any of the pooled mortgages are placed in foreclosure. The loss represents interest and other foreclosure costs not allowed by FHA or VA. During iscal year 1976, $12.9 billion in securities was issued, an increase of $7 billion over the previous yea,. The securities outstanding at September 30, 1976, totaled $27.1 billion. Issuers are required to furnish monthly financial eports to the Association that include data on their payments of principal and interest to security holders. The Association selectively reviews these reports. It also makes selected 8 visits to the issuers and to the custodians of mortgage docu- ments. The purposes of these visits are to (1) review their records, (2) verify that the mortgage documents are held by the proper custodian, and (3) provide them with guidance. BOND-TYPE SECURITIES On bond-type securities, interest is paid semiannually and principal is paid at maturity, which is generally 2 to 25 years after issue. FNMA and the Federal Home Loan Mortgage Corporation have issued securities of this type. However, in fiscal year 1976, no securities were issued. Securities out- standing at September 30, 1976, totaled $1,622 million--a reduction of $404 million from the previous year. 9 CHAPTER 5 SCOPE OF EXAMINATION AND OPINION ON FINANCIAL STATEMENTS SCOPE OF EXAMINATION We examined the Association's statement of financial condition as of September 30, 1976, and its related state- ments of income, expenses, and retained earnings and changes in financial position for the 15-month period ended Septembe- 30, 1976. The statements are presented on a combined basis and separately for the special assistance functions, the management and liquidating functions, and the mortgage-backed securities guaranty program. We did not examine the financial statements of the Govern- ment Mortgage Liquidation Trust, the Federal Assets Liquida- tion Trust, and the Federal Assets Financing Trust. We did, however, examine the Association's interest as trustor in these trusts. An explanation of the trust operations; the trusts' unaudited statement of financial condition as of September 30, 1976, and June 30, 1975; and the trusts' related statement of income and expense and a statement of changes in financial position for the years then ended are in appen- dix I. We made our examination in accordance with generally accepted auditing standards and included such tests of the accounting records and such auditing procedures as we con- sidered necessary in view of the effectiveness of the system of internal control. We previously made a similar examination of the financial statements for the year ended June 30, 1975. Our examination was conducted at the Association's office in Washington, D.C. We also observed and tested the work of the FNMA audit staff in their review of Association accounts at te FNMA regional office in Dallas, Texas, and at FNMA's office in Washington, D.C. In addition, we reslewed a report of the Federal Home Loan Mortgage Corporation in Washington, D.C., that pertained to mortgage-backed securi- ties guaranteed b the Association. We also reviewed and tested the work ct the Mortgage Corporation's audit staff in their review cf Association accounts. 10 OPINION ON FINANCIAL STATEMENTS In our opinion, the accompanying financial statements (schs. 1 through 3) present fairly the financial position of the Association at September 30, 1976, and June 30, 1975, and the results of its operations and the changes in financial position for the periods then ended, in conformity with principles and standards of accounting prescribed by the Comptroller General. 11 SCHEDULES 13 SCHEDULE 1 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION STATEMENT OF FINANCIAL CONDITION AT SEPTEMBER 3, 1976, AND JUNE 30, 1975 Combined 9/30/76 6/30/75, (in thousands)__ Assets Mortgages less unamortized discounts of $154,803,284 in 1976 and $153,509,851 in 1975 (Notes 1 and 2) $ 5,988,749 $ 5,456,580 Less mortgages subject to participation sales trust 962,233 1.110833 Net mortgages 5,026,516 4,345,747 Equity in trusts 412,531 413,037 Accrued interest receivable 28,791 23,686 Other -ceivables 42,179 11,649 Claims a&gainst FHA and VA (net of allowance for losses) 13,848 43,587 Cash 1,397 42,543 Federal securities at cost plus accrued interest 86,641 41,685 Deferred charges l. Q Total assets $ 5,611,933 $ 4,923,037 Liabilities Accrued interest payable to U.S. reasury $ 108,261 $ 167,6E6 Trust and deposit liabilities (Note 3 84,754 84,860 Accounts payable 30,353 14,456 Advance for mortgage purchases 9?8.750 Total liabilities 1,222,118 266,983 Investment of the U.S. Government Notes payable to U.S. Treasury 5,907,331 5,412,865 Retaiiel earliag or (deficit) (1,569,141) (799,083) Appropriatitns fr Trust Fund insufficiencie 51595 42272 Total investment 4.389.785 4,656.054 Total liabilitties and investment $ 5,611,903 $ 4,923,037 The notes on pp. 20 and 21 are an integral part of this schedule. 14 SCHEDULE 1 Special Assistince Management and Mortgage-Backed Functions iFuntion Loa4 s Sacuritis e Proeram 9/30/76 6/33175 9/30/76 6/30/75 9/30/76 6/30/75 (in thousands) $ 5,671,896 $ 5,079,699 $ 316,853 $ 376,881 $ $ 7027, 94.697 2594 6 3 4,969,099 4,275,002 57,417 70,745 309,348 312,742 103,183 100,295 28,463 23,296 328 390 14,405 5,106 24,569 5,045 3,205 1,498 13,406 42,583 442 1,004 1,033 42,430 171 88 193 25 43,012 15,535 377 141 43,252 26,009 _ 5 _ 54_ 54 $ 5,378,766 $ 4,717,243 $ 186,487 $ 178,262 $ 46,650 $ 27,532 $ 107,357 S 165,860 $ 904 $ 1,807 $ $ 65,961 68,8951 18,793 16,059 25,538 9,193 4,781 5,246 34 17 998.750 1,197,605 243,854 24,478 23,112 34 17 5,849,1$1 5,334,675 58,190 38,190 (1,719,575) (923,558). 103,819 96,960 46,616 27,5!.5 5159 -42.212 4.181fiLL 4.673389 162009 1 466 $ 5,378,766 $ 4,717,243 $ 186,487 $ 178,262 $ 46,650 $ 27,532 15 SCHEDULE 2 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION STATEMENT OF INCOME, EXPENSE, AND RETAINED EARNINGS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1976, AND JUNE 30, 1975 Combined 9/30/76 6i30/75 '__(in tlmands)-. Income Interest and discounts on mortgages $ 448,131 $ 194,493 Fees: Mortgage-backed securities 21,903 11,303 Commitment and other 21,396 3,811 Processing 1,286 944 Purchase and marketing 709 Income from investments 2,996 1,518 Other 1.445 2.237 Total income 497,866 214,306 Interest on notes payable t U.S. Treasury 654,303 312,115 Tandem plan costs 598,730 193,132 Fees: Servicing mortgages 11,744 5,C93 Processing 1,187 699 Administrative 14,358 7,586 MBS guaranty costs 4,846 709 Provision for possible losses 1,107 175 Other 47 9 Total expense 1,286,322 524,518 larnings or (lass) from operations (788,456) (310,212) GAin or (loss) from trust operations 17991 11966 Net earnings or (loss) (770,454) (293,246) Retained earnings or (deficit) at beginning of year (799,083) (501,050) Adjistments affecting prior years 406 Retained earnings or (deficit) at end of year $(1,569,141) $(799,033) The notes on pp. 20 and 21 are an integral part of this schedule. 16 SCHEDULE 2 Special Assistance Management and Mortgage-Bacrked Functions Liuidatine Functions S ozra .jqjcurite 9/30!76 6/30/75 9/30/76 L6/30/75 9i0/76 6/i30/75 in thousands) $ 441,511 $ 188,715 $ 6,620 $ 5,778 $ $ 21,903 11,303 21,396 3,811 1,286 944 709 2,996 1,518 1.230 2058 215 179 466,132 195,528 6,835 5,937 24,899 12,821 649,786 337,601 4,517 4,514 598,730 198,132 11,377 4,770 367 323 1,187 699 12,368 6,079 798 674 1,192 833 4,846 709 1,069 90 38 85 7 40 9 1,274,524 5L7,371 5,760 5,605 6,038 1,542 (808,392) (321,843) 1,075 352 18,861 11,279 12.226 8.18S 5,766 3,781 (796,166) (313,658) 6,841 4,133 18,861 11,279 (923,558) (610,035) 95,950 92,799 27,515 16,236 __ LQ 185 18 8 240 $(1,719,576) $(923,558) $ 103,819 $ 96,960 $ 45,616 $ 27,515 17 SCHEDULE 3 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION STATEMENT OF CHANGES IN FINANCIAL POSITION FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1976, AND JUNE 30, 1975 Combinec 9/30/76 6/30/75 (in thousands) Funds Provided: Income from operations $ 497,866 $ 214,306 Mortgage liquidations 7,867,147 1,491,659 Appropriations for participation certificate insufficiencies 9,323 8,077 Borrowings from the U.S. Treasury 4,938,511 3,285,830 Net changes in other assets and liabilities 964,281 3,399 Gain from trust operations 17,992 11,966 Adjustments applicable to prior year 406 212 Total funds provided $ 14,295,526 $ 5,015,449 Funds Applied: Expense of operations $ 1,286,322 $ 524,518 Mortgages purchased 8,547,916 3,474,399 Repayment of borrowings o the U.S. Treasury 4 '"4,045 1,006,300 Investments at cost plus unmatured net earnings 17,243 10.232 Total funds applied $ 14,295,526 $ 5,015,449 The notes on pp. 20 and 21 are an integral part of this schedule. SCHEDULE 3 Special Assistance Management and Mortgage-Sacked Functions LiquidatinR Functions Securities Program 9/30/76 6/30/75 9/30/76 6/30/75 9/30/76 6/30/75 (in thousands) $ 466,132 $ 195,528 $ 6,835 $ 5,958 $ 24,899 $ 12,820 7,853,819 1,487,571 13,328 4,088 9,323 8,077 4,938,511 3,285,830 986,326 (4,016) (20,187) 8,461 (1,858) (1,046) 12,226 8,185 5,766 3,781 148 185 18 27 240 $ 14,266,485 $ 4,981,360 $ 5,760 $ 22,315 $ 23,281 $ 11,774 $ 1,274,524 $ 517,371 $ 5,760 $ 5,605 $ 6,038 $ 1,542 8,547,916 3,474,399 4,444,045 989,590 16,710 _ _171243 10,232 $ 14,266,485 $ 4,981,360 $ 5,760 $ 22,31S $ 23,281 $ 11,774 19 NOTES TO THE ASSOCIATION'S FINANCIAL STATEMENTS GENERAL The combined statements of financial condition, income, expense, and retained earnings and changes in financial position exclude the Association's activity as trustee for the Government obligations participation sales trusts; data is furnished on the Association's activity as trustee in appendix I. NOTE 1: UNPAID PRINCIPAL OF MORTGAGE LOANS (sch. 1) The amounts reported for mortgage loans, including loans subject to the participation sales trusts, are at cost based on unpaid principal less unamortized purchase discount, part- icipation equities, and deferred andem plan discounts. The following amounts of unpaid principal are due to the Associ- ation from the mortgage debtors. Special Management and assistance liquidating Combined functions functions Grczs mortgage portfolio $6,143,551,920 $5,821,485,034 $322,066,886 Less unamortized discount 154,803,284 149,589,104 5L214,180 Mortgages less unamortized discount $5,988,748,636 $5,671,895.930 $31lE,85T 6 NOTE 2: COMMITMENTS TO PURCHASE MORTGAGE LOANS AT FUTURE DELIVERY DATES (Fch. 1) In addition to the mortgage principal presently included in the accounts, the Association has commitments outstanding at September 30, 1976, to purchase mortgage principal total- ing $19,074 million. NOTE 3: TRUST AND DEPOSIT LIABILITIES (sch. 1) The balances identified as trust and deposit liabilities include only the portion of mortgage tax and insurance pay- 20 ment deposits held directly by the Association. It is also responsible for payments by servicing contractors of taxes and insurance from mortgagors' funds held in escrow in banks insured by the Federal Deposit Insurance Corporation-- $25,272,134 at September 30, 1976, and $24,325,776 at June 30, 1975. NOTE-4: CONTINGENT- LIABILITY-AS GUARANTOR OFMORTGAGE-BACKED-SECURITIES The Association is contingently liable for about $28.7 billion pursuant to its guaranty of timely payment of princi- pal and interest to holders of mortgage-backed securities. These securities are issued by financial organizations and are based on, and backed by, pools of FHA-insured and VA- guaranteed mortgage loans. 21 APPENDIXES 23 APPENDIX I APPENDIX I TRUSTEE OPERATIONS The Association manages the assets and liabilities three trusts and guarantees the payment of principal and of interest on the participation certificates issued by the trusts. The three trusts are the Government Mortgage Liqui- dation Trust, the Federal Assets Liquidation Trust, and the Federal Assets Financing Trust. The agencies participating with the trustors in one or more of the trusts areAssociation as the (1) Farmers Home Administration, (2) Department of Health, Education, and Welfare, (3) Department of Housing and Urban Develop- ment, (4) Veterans Administration, and (5) Small Business Adminitration. These agencies conveyed title to assets (mortgages and housing-related debt instruments) to the trusts for which the Association is trustee. However, the agencies retained control and administration of these assets. The trustee issued and sold participation certificates to private and Government investors. The certificates are backed by these assets. The last certificate sales were in 1968. The agen- cies used the proceeds from these sales to reduce funds bor- rowed from the Treasury and to reduce the use of Government funds for their programs. Certificates outstanding at September 30, 1976, totaled $4.1 billion. TI. Association, as trustee, receives from the trustor agencies the principal and interest collected on the assets, less the agencies' service charges. These funds are used to pay interest on the participation certificates, pay trust expenses, and retire participation certificates at maturity. If these funds are not adequate, the Association requests additional funds from the trustor agencies. Specific appro- priations are available to the trustor agencies for payment of participation sales insufficiencies. In the Government Mortgage Liquidation Trust, five issues of participation certificates, totaling $1.8 billion, have been sold since the trust was established. The last issue was sold in 1966. During fiscal year 1976, certifi- cates totaling $115 million were redeemed. The outstanding certificate balance was $655 million at September 30, 1976. The certificates mature at various times through 1981. Col- lections received during the fiscal year were sufficient to cover interest due on the certificates. In the Federal Assets Liquidation Trust, four issues of participation certificates, totaling $3.2 billion, have been 24 APPENDIX I APPENDIX I sold since it was established. The last issue was sold in 1968. During fiscal year 1976, no certificate redemptions were made. The outstanding certificate balance was $1 bil- lion at September 30, 1976. The certificates mature at various times through 1987. Because net interest earned on the assets and cash deposits held for the trustors were less than the interest expense incurred on the certificates, additional contributions of $8.4 million were made to the trust by the trustors. In the Federal Assets Financing Trust, four issues of participation certificates, totaling $4.3 billion, have been sold since the trust was established. The last issue was sold in 1968, and the certificates mature at various times through 1988. Durinq fiscal year 1976, no certificate redemptions were made. The outstanding certificate balance was $2.4 billion at September 30, 1976. Because net inter- est earned on the assets and cash deposits held for the trustors was less than the interest expense incurred on the certificates, additional contributions of $42 million were made to the trust by the trustors. We did not examine the following unaudited financial statements (schs. 1 through 3). 25 APPENDIX I SCHEDULE UNAUDITED GOVERNMENT NATIONAL MORTGAGE ASSOCIATION TRUSTEE FOR GOVERNMENT OBLIGATIONS PARTICIPATION SALES TRUSTS Statement of Financial Condition At September 30, 1976 and June 30, 1975 Combined Trusts 9/3Q/76 6/30/75 (in thousands) Assets Obligations subject to trust: Principal $3,101,450 $3,528,956 Accrued interest receivable - net 27,635 24.872 Total subject to trust 3,129,085 3,553,828 Collections due from trustors 21,926 27,372 Investments at cost plus unmatured net earnings 1,618,179 1,331,521 Cash 4.544 8 Total assets $.a7 $612 Labilities Participation certificates: (note 1) Principal $4,058,255 $4,173,255 Accrued interest payable 57.262 77.639 Total due certificate holders (note 2) 4,115,517 4,250,894 Accounts payable 14 25 Trustors' equity 65.203 661.810 Total liabilities $ 7 $ 7 The notes on p. 32 are an integral part of this schedule. 26 APPENDIX I Government Mortgage Federal Assets Federal Assets Lauidation Trut Liauoudation Truat Financina rua 9130L76 613175 9/30/76 61301_5 9/3076 6/3075 .(in thousands) $ 859,603 $ 987,551 $ 670,862 $ 815,588 $1,570,985 $1,725,817 2.352 2.680 7L733 8.467 17.550 13.725 861,955 990,231 678,595 824,055 1,588,535 1,739,542 6,603 7,086 5,053 8,471 10,270 11,815 336,435 312,864 416,755 289,666 864,989 728,991 2 1 6 6 4.536 1 $12a995 $L1 2 $'d.^00.409 $i.L22.198 on $$16 $ 655,000 $ 770,000 $1,025,000 $1,025,000 $2,378,255 $2,378,255 11.793 8.609 13.538 21.713 31.931 47.317 666,793 778,609 1,038,538 1,046,713 2,410,186 2,425,572 9 14 3 5 2 6 538.193 531.559 61.868 75.480 58.142 54771 $sla m $~ $$131019 $$A § $&,AA 27 APPENDIX I SCHEDULE 2 UNAUDITED GOVERNMENT NATIONAL MORTGAGE ASSOCIATION TRUSTEE FOR GOVERNMENT OBLIGATIONS PARTICIPATION SALES TRUSTS Statement of Income and Expense For the Fiscal Years Ended September 30, 1976 and June 30, 1975 Combinead Tr-nts 9/301/76 6/30/75 (in thousands) Interest earned on obligations Subject to trust - net of allowance for servicing expense $ 173,589 $ 154,849 Investment income 124140 80.569 Total income $ 297729 $ 235.418 Expense Interest on participation certificates $ 295,612 $ 241,419 Administration 270 253 Total expense $ 295.882 $ 241,672 Net income or (loss) from operations $ 1,847 $ (6,254) Interest contributions by trustors 51,482 38,694 Interest retained by trustors (54,479) (29,595) Net allocation to trustors $ (1 ) $ 845 The notes on p. 32 are an integral part of this schedule. 28 APPENDIX I Government Mottgage Federal Assets Federal Assets Liauidation Trust Liquidation Trust Financina Trust 9/3076 6130/75 9/30/76 6/3075 9~30/76 6/30/75 (in thousands) $ 54,287 $ 48,881 $ 35,345 $ 32,762 $ 83,957 S 73,206 24-968 19.378 30.684 16.864 68.488 44.327 $ 79255 $ 68,252 $ 66.029 $ 49.626 $ 152,445 $ 117533 $ 44,276 $ 40,282 $ 66,375 $ 53,100 $ 184,961 148,037 96 82 60 _ 58 114 113 $ 44372 $ 40.364 $ 66'.435 $ 53.158 $ 185.075 $ 148.150 $ 34,883 $ 27,895 $ (406) $ (3,532) $ (32,630) $ (30,617) -0- -0- 8,685 7,607 42,797 31,087 (49,935) (24,967) (3,632) (966) (912) (3,662) $ £S 052) $ 928 $ 4.647 $ 3.109 $ 9255 $ . 2) 29 APPENDIX I SCHEDULE 3 UNAUDITED GOVERNMENT NATIONAL MORTGAGE ASSOCIATION TRUSTEE FOR GOVEiRNMENT OBLIGATIONS PARTICIPATION SALES TRUSTS Statement of Changes in Financial Position For the Fiscal Years Ended September 30, 1976 and June 30, 1975 Comblnad Trusts 9/a0/76 6/30/75 _(in thousands) Funds Provided Income from operations $ 297,729 $ 235,418 Obligations subject to trust: Principal deposits 427,506 340,562 Accrued interest receivable (4,542) 6,398 Collections due from trustors 5,446 (2,611) Additional interest contributed by trustors (2,997) 9,099 Increase or (decrease) in cash (4-536) 15 Total funds provided $ 718606 $ Expense of operations $ 295,882 $ 241,672 Retirement of participation certificates 115,000 110,000 Accrued interest payable 20,377 1,377 Investments acquired 284,879 224,756 Additional principal retained by trustors 2,458 11,072 Miscellaneous accounts payable 10 4 Total funds applied $ $ The notes on p. 32 are an integral part of this schedule. 30 APPENDIX I Government Moregage Federal Assets Federal Assets Liauidat'on Truat Lisuidatian Truat Finaneing Truat 9/30/76 6/0/735 gLazA1 1QLin7 9/13/76 6/30/75 (in thousands $ 79,255 $ 68,259 $ 66,029 $ 49,626 $ 152,445 $ 117,533 127,949 108,586 144,726 99,197 154,831 132,779 328 281 733 1,164 (5,603) 4,953 482 (7,086) 3,419 2,724 1,545 1,751 (49,935) (24,967) 5,052 6,641 41,886 27,425 0 14 (4.536) X $158.79 $ 5.08 $ 219959 $159.352 $34068 $ L4.442 $ 44,372 $ 40,364 $ 66,435 $ 53,158 $ 185,075 $ 148,150 115,000 110,000 (3,183) 1,377 8,175 15,385 23,570 (6,839) 127,089 103,398 134,220 128,197 (21,685) 181 18,258 2,796 5,885 8,095 S 4i 2 3 $5.09 $ 5.087 $ $159.352 $30 561 $ 4442 31 APPENDIX I APPENDIX I NOTES TO THE TRUST'S FINANCIAL STATEMENTS NOTE 1: PARTICIPATION CERTIFICATES (sch. 1) The participation certificates of $2.4 billion in the Federal Assets Financing Trust do not include $85 million held by the trust as Treasury certificates. The certifi- cates were purchased by the trust and are subject to reissue. NOTE 2: CONTINGENT LIABILITY AS GUARANTOR OF TRUST LIABILITIES (sch. 1) As trustee, the Association has legal title to all trust assets. Additionally, by virtue of a separate guaranty in its regular corporate capacity, the Association is contin- gently liable for the timely payment of principal and inter- est due the trust beneficiaries. The Congress has authorized appropriations to trustor Federal agencies to meet trust obligations, as may be neces- sary. These agencies, having control and administration of the obligations subject to the trusts, have provided much of the financial data in schedules 1 through 3 of appendix I. 32 APPENDIX II APPENDIX II PRINCIPAL OFFICIALS RESPONSIBLE FOR THE ACTIVITIES DISCUSSED IN THIS REPORT Tenure of office From To DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT SECRETARY OF HOUSING AND URBAN DEVELOPMENT: Patricia R. Harris Jan. 1977 Present Carla A. Hills Mar. 1975 Jan. 1977 ASSISTANT SECRETARY FOR HOUSING (FHA COMMISSIONER): Lawrence B. Simons Mar. 1977 Present John T. Howley (acting) Dec. 1976 Jan. 1977 James L. Young June 1976 Dec. 1976 David S. Cook Sept. 1975 June 1976 David M. DeWilde (acting) Dec. 1974 Sept. 1975 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION: PRESIDENT: John H. Dalton (designated) David M. DeWilde Apr. 1976 Present Daniel P. Kearney July 1974 Mar. 1976 EXECUTIVE VICE PRESIDENT: Vacant Apr. 1976 Present Richard C. Dyas Apr. 1970 Apr. 1976 SECRETARY-TREASURER: Vilmer N. Nelson (Assistant Secretary-Treasurer) Nov. 1976 Present Albert J. Fulner, Jr. Nov. 1969 Nov. 1976 CONTROLLER: Vacant Mar. 1977 Present Robert C. Goetz (acting) Jan. 1977 Feb. 1977 Raymond J. Seitz June 1972 Dec. 1976 43
Examination of the Government National Mortgage Association's Financial Statements for the 15-Month Period Ended September 30, 1976
Published by the Government Accountability Office on 1977-08-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)